The Easy Money Is Over

Eric Roseman, editor of Commodity Trend Alert, says stocks and many commodities will have a much tougher time in 2008, and investors have to be selective.

I turned bearish on stocks in January for the first time since 1999. That’s a major confession, because it takes a lot to turn my sentiment indicators around, but the banks and other financial services companies have yet to fully come clean about their toxic mish-mash of mortgage-backed trash, and now it’s spreading to consumer, auto, and credit-card loans, too—all packaged the same way by Wall Street. The unemployment rate is rising, and if consumers’ balance sheets aren’t bad enough, the threat of losing a job makes them more reluctant to spend.

The US economy is facing a fresh bout of falling prices, or deflation, for the first time since 2001. Inflation abounds in many parts of the economy (namely, energy, food, and services), but overall, the huge deflationary impact of declining housing values coupled with plunging equity portfolios adds a bizarre and dangerous mix to the US and, possibly, international economic landscape.

In short, the easy money in stocks and even many commodities is over.

My primary concern is that subprime was supposedly a “contained” crisis, but now it’s affecting other segments of structured credit like credit card and auto loans. Previous crises, like the savings & loan debacle in 1989-1990, were contained [because] the Fed could throw billions at the market to stop the bleeding. Not so with subprime; it’ll take much more money and more time.

Some commodities will continue to make formidable gains while others, more sensitive to the global economic cycle, will stumble.

Base metals peaked in 2006 and began topping out last year. The majority of this sector, which has led the commodity bull market since 2001, will at best trade sideways this year and at worst, will crash. Don’t touch anything related to the industrial metals.

I’m still a long-term energy bull, [but] at this stage we’re on hold. Don’t buy anything tied to energy over the next six months. Oil prices have further to fall, probably to the $65- to $70-a-barrel range, before recovering.

Although gold and platinum remain heavily overbought and will correct violently before resuming new highs, this is where investors are going to make great profits this year. The gold stocks have a long way to go as gold bullion crosses $1,000 an ounce this year. As more turmoil plagues the markets and the dollar, gold will race much higher; I’m just expecting a short-term but brutal correction to occur first.

As for agriculture, wheat and soybeans virtually doubled last year, but [they] remain at least 70% off their 1980 inflation-adjusted highs. Corn, soybean oil, cocoa, coffee, sugar, cotton and other foodstuffs will likely earn top spot amid commodity markets this year along with the precious metals, as shortages remain severe. The trend here is just mind-blowing bullish, regardless of subprime or recession.

The key to successful commodity investing this year is to avoid cyclically sensitive sectors of the complex (base metals, energy) and focus on the right entry points to build our precious metals and soft commodity positions. That’s our bottom line.